New Evidence on the Relation between the Enterprise Multiple and Average Stock Returns

Tim Loughran and Jay W. Wellman

Journal of Financial and Quantitative Analysis, 2011, vol. 46, issue 6, 1629-1650

Abstract: Practitioners increasingly use the enterprise multiple (EM) as a valuation measure. EM is (equity value + debt + preferred stock – cash) / (EBITDA). We document that EM is a strong determinant of stock returns. Following Fama and French (1993) and Chen, Novy-Marx, and Zhang (2010), we create an EM factor that generates a return premium of 5.28% per year. We interpret EM as a proxy for the discount rate. Firms with low EM values appear to have higher discount rates and higher subsequent stock returns than firms with high EM values.

Date: 2011
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